Twenty years after one of the most devastating earthquakes rattled Southern California, most state residents are still financially unprepared for another big one.
Less than 15% of homeowners in California have earthquake insurance, according to 2012 data. This means if a big earthquake were to strike tomorrow, thousands of people would not be covered and the impact on the state would be substantial.
The resulting scenario could be very similar to what is still playing out on the East Coast following the landfall of Superstorm Sandy in 2012, where many residents who sustained damage did not have flood insurance. More than fifty percent of the people who applied to the Federal Emergency Management Agency for money were not granted it. For the fortunate ones whose applications were accepted, some are still waiting on payouts, at least as of last fall.
On January 17, 1994, in the wee hours of the morning, a previously unknown fault ruptured, or slipped, in the greater Los Angeles area. The damage produced by the resulting magnitude 6.7 event was stunning: about 60 people were killed, more than 7,000 others injured, some 20,000 people were left homeless and over 40,000 buildings were damaged. The final bill for direct economic losses (including damaged homes, highways, stores and government buildings) was around $25.7 billion; when secondary losses are considered, for example, the losses to businesses from being closed for weeks or months, the total bumps up to $40 billion.
(Find first-hand recollections of the event that sent millions stumbling out of their beds blurry-eyed and frantic into the dark streets of Los Angeles at 4:31 a.m. here.)
Today, the 1994 event ranks as the fifth most expensive earthquake in terms of insured modeled losses to strike the United States. In other words, if the event were to re-occur today, Boston-based catastrophe modeling firm AIR Worldwide estimates that it would cause about $24 billion in insured losses. The actual event resulted in $12.5 billion in 1994. The difference stems from growth in exposure and inflation, AIR wrote in an e-mail to The Raptor Lab.
Hurricane Katrina, in contrast, generated over $40 billion in insured losses.
The earthquake was so devastating to the insurance industry back in the 1990s that it prompted some major legislative changes in the state. In 1996, lawmakers paved the way for the creation of a privately funded, publicly managed, not-for-profit organization to offer easily accessible California earthquake insurance—and this is how the California Earthquake Authority (CEA) was born.
Similar to flood coverage in the U.S., which is provided by the National Flood Insurance Program, earthquake coverage is not part of a standard homeowner’s insurance package. In California, homeowners can secure earthquake coverage through the CEA.
But unlike flood coverage, which is mandatory for people looking to obtain mortgages in flood-prone areas, lenders do not require people to buy earthquake insurance in at-risk seismic areas in California.
Earthquake insurance can be expensive, with deductibles around 15 percent of a building’s value. As a result, most homeowners opt to not have coverage.
“While the insurance industry is much better prepared to handle high losses than it was in 1994, its current stake in the game is insufficient to protect home and business owners from disastrous financial consequences,” said AIR.
This means that “the next big earthquake would not only put stresses on the uninsured, but would test the resiliency of lending institutions, local and state governments, and the final backstop—the federal government.”
Despite the low penetration of earthquake insurance in California, many improvements have been made in terms of retrofitting old buildings to better withstand future shaking (although there is still a long way to go to get all old buildings in California safe), as well as the increasing popularity of public outreach events on how to react during an earthquake.
Zahra Hirji is a earth science writer.
Full disclosure: Zahra previously worked as a technical writer for AIR Worldwide.